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Common Mortgage Mistakes and How to Avoid Them

Before you leap into signing a contract, delve into these four common mistakes – and how to avoid them.

Before you leap into signing a contract, delve into these four common mistakes – and how to avoid them.

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Common Mortgage Mistakes and How to Avoid Them

Buying your first house is an exciting milestone, and it’s easy to get caught up in the thrill of looking for your perfect fit. Whether it’s a family home or an investment property, a mortgage is a 25 – 40-year financial commitment and not a decision to be taken lightly. Navigating the property ladder should be done cautiously and armed with all the facts. Before you leap into signing a contract, delve into the four common mistakes often made by first-time buyers – and how to avoid them.

Key Mortgage Mistakes to Avoid
The importance of a good credit score

Your credit score is what lenders use to assess your creditworthiness. Therefore, a good score is pivotal in determining your mortgage rate and your chances of approval. Your score communicates how much of a risk you’re likely to be – essentially, will they get their money back? Higher scores also typically result in better mortgage rates and more options.

Check your credit score online with Experian, Equifax or TransUnion to see where you fall on the scale. A common misconception is that a low credit score means you won’t qualify for a mortgage, but this is not necessarily true. However, it is advisable to take steps to increase your rating. Bolster your score by registering for the electoral role, don’t max out credit cards, and close most, but not all of your credit accounts. Other strategies to improve your credit score include reducing debt, making timely payments, and keeping your credit utilisation to a minimum.

Shopping around for mortgage rates
As stressful as it can be to buy a first home, we urge you to take the time to shop around for mortgage rates. For the majority of the population, a home mortgage is the largest and longest financial obligation in our lives, so start on a good footing by comparing different rates from different lenders using a comparison site or a mortgage broker. Weigh the pros and cons of the monthly payment amount, interest rate, fees and annual percentage rate (APR). Also, take into account any government schemes for which you might qualify. Remember, not shopping around could result in higher costs in the long term.

Overlooking mortgage fees
Mortgage fees can add up quickly and significantly impact the overall cost of your loan. Be aware of the various fees involved so you don’t strain your finances unnecessarily. Here are a few of the different fees you can expect to pay:

Arrangement fee (£0 – over £2000)*: This is sometimes known as the product fee or completion fee and is charged for the actual mortgage product. Sometimes, this fee can be added to your mortgage amount. Check with your lender if this fee is refundable if the mortgage falls through.

Booking fee (£99 - £300)*: Some lenders charge this fee to apply for a mortgage. If charged, it is normally included in the arrangement fees and is not refundable if the mortgage falls through.

Valuation fee (£250 - £1500)*: This fee is charged to value the property you want to buy to make sure it is worth the amount you want to borrow. Some lenders don’t charge this fee, but the amount you pay will be dependent on the value of the property.  Additionally, you can choose to pay for your own property survey in order to identify the repairs and maintenance the property might need.

Telegraphic transfer fee (£25 - £50)*: Also known as CHAPS (Clearing House Automated Payment System), this is the fee charged by the mortgage provider to transfer the loaned money to your solicitor. This is not refundable if the deal falls through.

Mortgage account fee (£100 - £300)*: This is your lender’s administration fee for setting up, maintaining and closing your mortgage.

*This is not a complete list of fees payable. The amounts mentioned are estimates only and are liable to change.

Not understanding mortgage terms and conditions*

Many borrowers fall into the trap of not fully understanding the terms and conditions of their mortgage agreement, which can lead to unforeseen challenges down the road. Take special note of the deposit amount expected, type and amount of interest rate, monthly repayment amount, the Annual Percentage Rate of Charge (APRC), completion date, mortgage term, conveyancing fees and all other fees. Familiarise yourself with standard mortgage terms and seek professional advice if needed to ensure you fully comprehend your obligations and rights as a borrower.

*Please seek professional advice for clarification and guidance.

Navigating Interest Rates and Loan Types

There are two main types of mortgages:

Fixed-rate mortgages
The interest rate remains the same during the number of years you ‘fix’ your mortgage – usually between two to five years.

Your monthly payment stays the same, which will help you budget.

If interest rates fall, you won’t benefit from this.
Deals offered on fixed-rate mortgages are usually slightly higher than variable-rate mortgages.

Once your fixed term is up, you’ll move to a variable rate unless you remortgage.

Variable-rate mortgages

The interest rate fluctuates and is set at the lender’s discretion.

You are not locked into a mortgage deal for a specific time period, giving you the freedom to shop around if you wish.
If the interest rate falls, your monthly payments decrease.
You may be offered a discount at the start of your loan, saving you money in the long term.

If interest rates rise, your monthly payments increase.

Be sure to set aside extra money in case your monthly payment increases.

Another option is an interest-only mortgage. This type of loan involves only paying the interest amount back to the lender each month for the duration of your loan, but your overall loan amount doesn’t get any bigger. As an example, if you borrow £300,000 on a 20-year interest-only mortgage, at the end of the 20 years, you’ll still owe £ 300,000 because you’ll pay off the interest monthly. When your loan term ends, you’ll have to repay the £ 300,000 in one sum. You can do this with savings, by selling the property, or by remortgaging.

Before choosing a mortgage type, carefully weigh up your situation and choose the one that best suits you. Consider your current situation, your financial stability, your risk tolerance and future goals.

Budgeting and Financial Planning for a Mortgage

Calculating what you can afford involves considering your income, debts, and living expenses. It is crucial to establish a realistic budget that allows for comfortable home ownership. Consider squirrelling some extra money into a contingency fund before you buy because overstretching yourself financially leads to stress, financial instability, and potential repossession.

Keep in mind that what you can buy, is not always what you can afford. Factor in additional home ownership costs beyond the mortgage, like a deposit, stamp duties, property taxes, insurance, utilities, maintenance and moving costs. Work out your net monthly income, then list every single expense you have currently and will have as a future homeowner. A general rule of thumb is that your mortgage cost shouldn’t be more than around 30% of your income.

Your lender will consider your debt-to-income (DTI) ratio before making their decision. Calculate your DTI by dividing your total monthly debt payments by your total gross monthly income. Multiply this amount by 100 to convert to a percentage. 20 – 29% is considered a good ratio, although some lenders will consider up to 45%. Improve your DTI by increasing monthly debt payments to pay them off faster. Don’t take on new debt, and look for ways to increase your income.

The Benefits of Professional Mortgage Advice

Seeking professional mortgage advice can provide invaluable support throughout the homebuying process. Mortgage advisors offer personalised guidance based on individual financial situations and can help navigate complex terms and processes. Their expertise can help avoid common pitfalls and ensure that borrowers make informed decisions aligned with their goals. The Openwork Partnership exemplifies this commitment to providing comprehensive support and guidance to clients, making us a trusted partner in the mortgage journey.

Avoiding common mortgage mistakes requires diligence and a thorough understanding of the homebuying process. By being informed and cautious, borrowers can navigate the complexities of mortgages more effectively and secure their financial future. Remember to assess your financial readiness, conduct thorough research, and seek expert guidance to make the most informed decisions regarding your mortgage.

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